It’s human nature that when things are going well, we tend to put off basic maintenance. Who hasn’t let more than six months go by between dental visits or driven more than 5,000 miles between oil changes?
The same thing often occurs with our investment portfolios. When the stock market is going like gangbusters, we tend to think that the good times will never end.
And why tinker with success? After all, the S&P 500 SPX, -0.26% hit more than 50 record highs in 2021 alone. Some of the biggest stocks keep getting bigger faster. It took almost 40 years for Apple AAPL, -0.35% to become the first trillion-dollar company in terms of market capitalization. It hit this plateau in 2018 and took just two more years to rise to $2 trillion in value. Nowadays, Microsoft MSFT, -0.88%, Alphabet (Google) GOOGL, -0.92%, Amazon.com AMZN, -1.14%,Tesla TSLA, -1.27% and Meta Platforms (Facebook) FB, -2.33% have also joined the trillion-dollar club.Advertisement
But at some point the music will stop. Inflation is likely to continue into 2022 and beyond. In response, the Federal Reserve is expected to raise short-term interest rates several times next year, which will make it more expensive for consumers to borrow money for big-ticket purchases and for companies already struggling with razor-thin profit margins. Nervous investors may shed some of their stock holdings to reduce their exposure to stocks.
Should you do the same? That depends on whether your portfolio follows an asset allocation strategy with a targeted mix of stock, bond and cash investments that reflects your savings objectives, timeframe and risk tolerance. Even if it does, at some point you’ll want to give it a tune up using a sensible portfolio rebalancing strategy